ECON 1450 – Professor Berkowitz Lecture Notes -Chapter 4

1. ECON 1450 – Professor BerkowitzLecture Notes -Chapter 4 • Contract law • Legal means by which people enforce promises to each other • Examples – marriage, inheritance, labor contracts, etc • KEY ISSUE – what promises should be legally enforceable? • VALID CONTRACT – both parties should have mutual gains

2. Mistake and the Duty to Disclose Private Information • Doctrine of mistake – situations in which parties form a contract on the basis of mistaken beliefs • Court will not enforce a contract based on a mutual mistake • What a about a unilateral mistake?

3. Key Case – Sherwood v. Walker1887 • Key issues – when should private information be disclosed? And, when the government enforce a contract? • When should a party be obligated to disclose private information??? • In this case the buyer’s beliefs about the cow are unobservable and s.t. misrepresentation

4. Economic Theory of Mistake • What rules enhance economic efficiency of a contract when there is “asymmetric information?” • Key distinction made about information to solve this problem: • Socially valuable information versus • Purely distributive information

5. Results • Purely distributive – courts should impose a duty to disclose; • Information that is socially productive – courts should not impose a duty to disclose – in this case there is a market failure and the gathering of information should be encouraged as it increase social surplus

6. Disclosure of information • Information deliberately acquired – purely distributive – courts should impose a duty to disclose • Information casually acquired – socially productive – courts should not impose a duty to disclose • Disclosure of unfavorable information • Unconscionability